In the long national nightmare that has been the crash of Valeant Pharmaceuticals, we’ve seen Wall Street make some conjectures that were wrong — dead wrong.
Things have been especially off base this week, as the company’s stock has twice ripped higher on upgrades (are we allowed to call them that?) from two Wall Street analysts.
But before we get to that, lets talk about the latest things that have happened to the company.
- Last Tuesday the company reported an earnings loss, missing projections for the first half of the year. The company did, however, maintain its guidance for the rest of the year and said that it would seek to pay down debt by selling non-core assets (worth an estimated $2 billion), so the market cheered.
- Last Friday the Wall Street Journal reported that Valeant is under federal criminal investigation for allegedly defrauding insurers through its now-defunct, formerly secret distributor pharmacy, Philidor.
- And on Wednesday, the company, which is over $30 billion in debt, has to come to an agreement with lenders to relax its debt covenants. Valeant offered to pay higher interest payments in order for one of the covenants to be loosened.
Not the rosiest picture, but Valeant’s seen worse days. The stock has fallen around 90% since October thanks to a combination of government scrutiny over its pricing practices and accusations of malfeasance from a short seller, who revealed the existence of Philidor.
Some days you get the bear
That said, a heavily indebted company with an untested (and so far unsuccessful) business model, under civil investigation from the state of North Carolina, the SEC and the Department of Justice, and which just disclosed that it is under criminal investigation from US Attorney Preet Bharara does not necessarily seem like a delicious investment prospect.
Unless of course, you toss out some of those problems, and focus on one thing alone — Valeant is not completely imploding and going to zero in the next few months (weeks, days, hours… whatever).
That’s what Mizuho Bank did on Monday. Based on this analysis, the bank just decided to take this baby day by day [from the note, emphasis ours]:
“VRX outfoxes the shorts via financial engineering, in spite of a 2Q:16 miss…
Management reiterated its FY:16 guidance of $9.9-$10.1B in revenue and EPS range of $6.60-$7.00, which we still view as unrealistic given the 2.2% sequential revenue decline in its top 30 products, 3.4% Q/Q decline in U.S. revenue, and significant pressure to cut SG&A spend.
However, the stock soared because management announced plans to divest assets and indicated it would amend its debt covenants to avoid default triggers if EBITDA slips below the lower end of guidance. Because there is now a lower likelihood of stock collapse from another guidance miss, we think our short thesis has been debunked and are upgrading VRX to Neutral with a $25 PT based entirely on an optimistic SOTP [sum of the parts] analysis.”
So since the company didn’t go to zero missing guidance, that’s the end of the short thesis on a stock that’s been crashing for almost a year? OK.
Mizuho then goes on to say that management’s estimates for the funds its asset sale would bring in (a sum of the parts analysis selling assets at 11x EBITDA) are “aspirational.” Remember, the market knows Valeant is desperate for cash — but then the bank uses management’s numbers in its analysis anyway.
This is a lot like last November, when Mizuho estimated Valeant would end up trading at $100 a share in a “liquidation scenario” firesale (another sum of the parts analysis). The stock is currently trading at about $28.
And some days the bear gets you
And then there’s Morgan Stanley, whose analysts slapped a $98 price target on the stock back in December (worst case $44 if former CEO Michael Pearson was forced to step down — he did). Most recently the bank slapped an overweight rating on Valeant based solely on the fact that it might get its covenants renegotiated and pay down debt.
“Upgrading Valeant from EW to OW and raising our PT from $33 to $42,” the bank wrote in a note to clients. “Although VRX still faces risks, we see the upside skew as attractive. Risk of severe financial stress should diminish as covenants are renegotiated and VRX pays down debt, and deleveraging should drive equity value accretion.”
So according to this logic, Valeant simply managing to pay back the money it owes should give it a big boost. Forget the fact that the company’s still losing money because its deal with Walgreen’s as a distributor isn’t profitable yet. Forget dismal sales in its top 30 drugs. Forget the lawsuits. Forget the fact that powerful politicians, especially Hillary Clinton, Senator Clare McCaskill (D-MO) and Senator Susan Collins (R-ME) is still giving it a hard look over its drug pricing practices.
And of course forget that the covenants haven’t been renegotiated yet. Finding out that Valeant is under criminal investigation may not have pleased lenders.
The following, after all, is part of the agreement they signed with the company. They have a right to walk away in the event of adverse proceedings:
“Adverse Proceeding ” means any action, suit, claim, proceeding, hearing (in each case, whether administrative, judicial or otherwise), governmental investigation or arbitration (whether or not purportedly on behalf of Borrower or any of its Subsidiaries) pursuant to any statute, regulation, ordinance, common law, equity or any other legal principle or process, or before or by any Governmental Authority, domestic or foreign (including any Environmental Claims), whether pending or, to the knowledge of Borrower or any of its Subsidiaries, threatened against or affecting Borrower or any of its Subsidiaries or any property of Borrower or any of its Subsidiaries.
Valeant did not respond to Business Insider’s request for comment on that issue.